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ECONOMICS
Bloomberg Businessweek
October 8, 2018
40
An important issue facing the global economy
and markets in the final quarter of the year is
divergence—the widening economic and policy dif-
ferences among advanced economies as U.S. growth
outpaces that of Europe and Japan. The next few
months will also shed light on a second crucial
issue—how these divergences will ultimately be
reconciled. Will the U.S. lose momentum, dragged
down by slow global growth and/or a loss of domes-
tic policy momentum at home? Or will Europe and
Japan gain speed and converge with the U.S.?
These questions raise consequential issues well
beyond inancial markets, afecting the prospects
for trade wars, currency turmoil in emerging econ-
omies, the path for orderly normalization of mon-
etary policy in the advanced world, and, in the
political realm, the future of anti-establishment
movements and polarization.
Since the end of 2007, and including International
Monetary Fund projections for 2018, gross domes-
tic product in the U.S. has expanded a cumula-
tive 17.1 percent, compared with 11.6 percent in
Europe and 6.7 percent in Japan. The initial phase
of U.S. outperformance resulted mainly from big-
ger problems in other parts of the advanced world,
particularly in Europe, where the debt crisis
dragged down economic activity. Then followed a
short period of synchronized expansion and, most
recently, a pickup in the U.S. as both consumption
and business investment responded to tax cuts
and deregulation—a policy-induced boost that the
Federal Reserve expects to last for up to three years.
The robust U.S. labor market and an inlation
rate consistent with the 2 percent objective have
opened a bigger window for the Federal Reserve to
continue to deliver, adapting a phrase Bridgewater
Associates’ Ray Dalio used in a diferent context a
few years ago, “beautiful normalization” of mon-
etary policy. That is, it could raise rates closer to
their typical range and close the chapter on a pro-
tracted period of experimental and unconven-
tional policies implemented to deal with the messy
aftermath of the global inancial crisis. Already, the
central bank has stopped its program of large-scale
asset purchases, hiked interest rates eight times,
rolled out a program for the gradual contraction
of its $4 trillion balance sheet, and gotten the mar-
ket to price in an additional set of rate hikes for the
next 12 months—all without causing economic and
inancial distress domestically.
ThePerilsof Divergence
THE BOTTOM LINE A shortage in pipeline capacity is depressing
prices for Canadian crude, which is trading at a $39-a-barrel
discount to U.S. oil.
○ The key question: Will U.S. economic growth dip, or will the rest of the world start to catch up?
Trudeau’s administration typically counters
such criticism by saying its environmental
initiatives have allowed the industry to continue
growing without jeopardizing the country’s com-
mitments to curb carbon emissions. Trudeau has
also thrown the government’s full backing behind
the Trans Mountain project, spending $3.5 billion
to buy the project from Kinder Morgan Inc. to
ensure it gets built.
For its part, the government in Alberta has
run ads promoting the pipeline in neighboring
British Columbia, a stronghold of opposition to
the project. Authorities there are also revamp-
ing regulations and making other changes to
keep energy investment lowing in. “I think there
is a conidence in Alberta,” says Marg McCuaig-
Boyd, the province’s energy minister, pointing to
the Fort Hills opening and China-owned Nexen’s
C$400 million expansion of an oil sands project.
Even Pourbaix sees cause for hope. Before
taking the helm at Cenovus, he was chief operat-
ing oicer at TransCanada, where he was in charge
of the Keystone XL pipeline. That project has over-
come its biggest regulatory hurdles, and another
pipeline—Enbridge Inc.’s Line 3 expansion—is mov-
ing ahead as well.
In the meantime, Cenovus is shipping more of
its crude via costlier rail and occasionally throttling
back production when the Canadian oil discount
gets too wide. “I refuse to believe that Canada as a
country will not be able to get its act together and
ultimately get these pipelines built,” Pourbaix says.
“We stand at risk of being shut out entirely on this
global demand.”
—Kevin Orland and Robert Tuttle,
with Erik Hertzberg
○ Expansion of U.S.
gross domestic product
from 2007 to 2018
17.1%